Introduction
Top concerns
Overall 2022 outlook
Interest rates
Alternative real estate sectors
Work from home
Downtown office market
Impact of pandemic on investment strategies and decision-making
Infrastructure Investment and Jobs Act
Tokenisation
As the global economy continues to recover from the pandemic's impact over the past two years, 2022 marks a turning point for the commercial real estate (CRE) industry in the United States.
Executives are facing historic inflation, shifting workplace dynamics and an unstable supply chain. However, optimism remains high for 2022 as the industry carries over healthy momentum and a sharpened focus on new investment strategies.
128 real estate executives have weighed in on their top concerns for 2022 in an annual real estate market sentiment survey, which includes responses from owners, developers, investors, asset managers, brokers, lenders and consultants.
While survey respondents were focused on pandemic-specific problems in 2021, CRE professionals have now flagged economic hurdles as areas of high trepidation. The top three concerns for real estate executives in 2022 corresponded to the many challenges impeding economic growth:
- inflation;
- labour shortages; and
- supply chain challenges.
Falling just outside the top three, CRE professionals listed Omicron and continued covid-19 variants as their next top concern.
Interestingly, remote work and today's social and political climate remained in the scores, while the concern for cybersecurity threats increased slightly from 2021.
Delays in the emergency rental assistance programme have been a hot topic in industry circles, but this ranked as the lowest concern among CRE professionals in 2022.
The CRE industry is feeling optimistic about 2022 even with multiple rate hikes likely commencing in March. Most real estate executives see 2022 as a year of opportunity, while a few believe retrenchment is on the horizon. This may be linked to the desire to accelerate deals before rate hikes hit the market.
While the survey consensus followed the federal guidance and industry executives predict at least three hikes this year, there was more uncertainty about where the interest rate ceiling is and when the market will start to suffer.
This sentiment was almost identical to that of 2021, when the majority of real estate executives believed that 2021 would be a year of opportunity, and only a few believed retrenchment was more likely.
The Federal Reserve has announced that it will increase short-term interest rates in 2022, and most CRE executives expect two to four interest rate hikes, at 25 points a clip.
With regard to the impact of this increase in interest rates, some real estate executives believe the CRE industry is looking over the edge and can only absorb 51-100 basis points before there are adverse consequences. Others, however, think the market is stronger and can absorb 101-150 basis points. This market confidence may be a reflection of historic low rates in 2021, sound fundamentals, and plentiful debt and capital.
Alternative real estate sectors
CRE executives are eager to capitalise on the current market momentum and are set on investing in a broad range of sectors in 2022. Leading the results were "life sciences", followed by "single family rental" and "data centres".
Most CRE executives think the new work-from-home dynamic will have a lasting impact on the residential market. This sentiment has increased slightly from last year.
When evaluating the office market, the vast majority thought the hybrid model ramifications will be felt for a long time, as was the case in 2021's survey.
Despite the gloomy forecast for the office market, a sizeable third of CRE executives believe holding onto these downtown assets is a smart move in the next two years.
Impact of pandemic on investment strategies and decision-making
The pandemic has had no bearing on the investment strategies of most real estate executives, and they will not relocate their workforce to other states. This sentiment has risen from last year.
A quarter of CRE professionals indicated that the pandemic has played a factor in company decision-making.
Infrastructure Investment and Jobs Act
Last year, nearly half of industry executives thought the Biden administration would have a positive impact on the real estate industry. In November 2021, the administration's Infrastructure Investment and Jobs Act passed with bipartisan support. Notably, a quarter of CRE executives are planning to increase their company's investments in infrastructure-related projects and take advantage of the new federal legislation in the next five years.
Significantly, a majority of CRE professionals who are planning to take advantage of the Act are actively involved in development for their organisations. Since infrastructure projects tend to move slowly, these investment plans from a quarter of development decision-makers in the first year is significant.
Despite the increased interest of tokenisation across the country, the CRE industry does not yet see non-fungible tokens as a viable form of capital in their transactions. Almost all CRE executives said they will pass on the new strategy this year. The results showed that the vast majority have not considered tokenisation.
While most admitted they are confused by the concept, some real estate executives are sceptical of the lack of regulation in the novel marketplace. Only a few real estate executives are satisfied with the current menu of capital source options.
For further information on this topic, please contact Christa Dommers, Ron Gart, Christine Kim or Paul Mattingly at Seyfarth by telephone (+1 (212) 218-5616) or email ([email protected], [email protected], [email protected] or [email protected]). The Seyfarth website can be accessed at www.seyfarth.com.